As the US shale drilling boom floods the world’s biggest crude market with supply, explorers are at greater risk of a price collapse that would turn some investments into money losers.

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By JOE CARROLL

Bloomberg

ConocoPhillips and Royal Dutch Shell are among global oil
companies needing crude prices as high as $150/bbl to turn a
profit from Canadas oil sands, the costliest petroleum
projects in the world, according to a study.

The next most-expensive crude projects are in the deep waters
off the coasts of Africa and Brazil, with each venture
needing prices between $115 and $127/bbl, said Carbon Tracker Initiative, a
London-based think tank and environmental advocacy group, in a
report.

As the US shale drilling boom floods the worlds biggest
crude market with supply, explorers are at greater risk of a
price collapse that would turn some investments into money
losers. Energy explorers are willing to invest in high-cost
oil-sands developments because once they are up and running,
they produce crude for decades longer than other ventures
such as deepwater wells, said David McColl, an analyst at
Morningstar in Chicago.

Where else can you get 10 to 30 years of predictable
cash flow? said McColl, who estimated new oil sands projects require $60 to $100 crude
to make sense. The returns may not be stellar compared
to some other projects but they are steady.

Redeploying Capital

After four straight years of gains, Brent crude, the
benchmark price for most of the worlds oil, declined
0.3% last year to an annual average of $108.70. Brent for
September delivery slumped as low as $102.10, a 13-month low,
on the London-based ICE Futures Europe exchange.

In order to sustain shareholder returns, companies
should focus on low-cost projects, deferring or cancelling
projects with high break-even costs, the reports
authors wrote. Capital should be redeployed to share
buybacks or increased dividends.

Carbon Tracker said it derived its
projects list and cost estimates from a database compiled by
Rystad Energy, an Oslo-based oil-industry consulting firm.

ConocoPhillips, an investor in two of the three most-
expensive projects on Carbon Trackers
list, subscribes to the same Rystad database, said Daren
Beaudo, a spokesman for the Houston-based oil producer.
Carbon Trackers cost estimates are twice as high as
they should be, based on ConocoPhillipss analysis, he
said.

We dont believe the estimates CTI are quoting are
accurate or realistic, Beaudo said in an e-mailed
statement. We believe there is great value to having
oil sands in our portfolio.

Shareholder Pressure

In May, Carbon Tracker released a report that said the oil
industry was at risk of wasting $1.1 trillion of
investors cash on expensive developments in the Arctic,
oil sands and deep oceans. That figure represents the amount
explorers may spend on oilfields that need crude prices of
$95 a barrel or more, the group said three months ago.

Oil companies face growing pressure from shareholders to rein
in costs after two decades of bigger spending have failed to
boost production or profitability, said Steven Rees, who
helps oversee $992 billion as global head of equity strategy
at JPMorgan Chase Bank.

At-Risk Projects

The projects most at-risk from lower prices are
ConocoPhillipss Foster Creek development and
Shells Carmon Creek, oil-sands developments in Alberta
that respectively need $159 and $157 a barrel oil to be
profitable, Carbon Tracker said.

A joint ConocoPhillips and Total oil-sands project called
Surmont requires $156/bbl, while ExxonMobils Aspen and
Kearl developments in the same part of Canada need $147 and
$134 crude, respectively, to make economic sense, the study
found.

ConocoPhillips plans to spend $800 million/year on oil-sands
projects over the next three years that will generate more
than $1 billion in annual cash flow starting in 2017, Beaudo
said. Those cash flows will increase over time and last for
decades, providing funds for other types of oil developments,
he said.

Shell, Europes biggest company by
market value, relies on a per-barrel price range of $70 to
$110 for the purposes of longer-term project planning, Sarah
Bradley, a spokeswoman for The Hague-based corporation, said
in a telephone interview. She didnt directly address
the studys findings with regard to the oil sands.

An Exxon spokesman said he couldnt immediately comment
on the studys findings. A request for comment from
Total was not responded to immediately.

Other high-cost regions highlighted in the report included
the Partitioned Nuetral Zone shared by Saudi Arabia and
Kuwait, the Arctic and the Gulf of Mexico.

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Pricing would be right...if the trend had continued. Thankfully it did not. However the author did note that Carbon Tracker created its list from another company's database (Rystad Energy.) There is plenty of potential for 'oops' which could be why ConocoPhillips disputes Carbon Trackers findings.

Or it could be a CYB company line put out by ConocoPhillips. To insulate itself from investor concerns and withdrawal.

w. pierce08.19.2014

Surprised to hear that experienced energy companies have several projects are based on $ 150/bbl oil when that level represents an absolute peak reached back in 2008. Are we sure the author has this right?